Question

On January 1, 2016, Cobb Co. received, for the sale of a parcel of land, a ten-year note receivable having a face amount of $2,000,000 and a stated interest rate of 8% payable annually each December 31. The market rate of interest for this type of note is 10%. Present value factors are as follows: At 8% At 10% Present value of 1 for 10 periods 0.46319 0.38554 Present value of an ordinary annuity of 1 for 10 periods 6.71008 6.14457

Answer 1

Answer: $‭1,754,211

Explanation:

8% of $2,000,000 will be payable every year for 10 years;

= 2,000,000 * 8%

= $160,000

The amount received from selling the land is;

= Present value of interest payable annually + Present value of Note

= (160,000 * Present value interest factor of annuity, 10 years, 10%) + (2,000,000 * present value interest factor, 10 years, 10%)

= (160,000 * 6.14457) + (2,000,000 * 0.38554)

= $‭1,754,211